Posts Tagged ‘second mortgage’

Piggyback Mortgage Loan Information

A piggyback loan is a mortgage loan in which the financing is handled by two different lenders. The first lender finances a large portion of the loan, usually 80% and another seperate lender finances the remaining balance of the loan. There are three common options of piggyback loans, 80-10-10 loan, the 80-20 loan (also known as the 80-20-0 loan) and the 80-15-5 loan.

An 80-10-10 loan is when the first mortgage finance company finances 80% of the loan amount, the second finance mortgage company finances 10% of the loan balance and 10% of the balance is paid down by the purchaser. The 10% financed by the second lender is basically a second mortgage on the home.

An 80-20 loan is when the first mortgage finance company finances 80% of the loan amount and the second lender finances the remaining 20% of the loan as a second mortgage. No down payment is paid by the borrower or there is already some equity in the home.

The final typical type of piggyback loan is the 80-15-5. The first lender finances 80% of the mortgage balance. The second lender finances a second mortgage for 5% of the loan amount and 5% of the balance is paid down by the buyer.

The biggest pro of a piggyback loan is that 20% of the home value is paid for through a down payment or by the second lender. This means that the first mortgage lender doesn’t charge PMI or private mortgage insurance. Private mortgage insurance is a third party insurance required by lenders if you do not have 20% equity in your home. It protects lenders from borrowers in case they file bankrupsy. A piggyback loan reduces the loan risk of the lender because they aren’t financing the entire amount. Avoiding PMI can save you hundreds of dollars per month depending on the equity and financing terms.

There are three major cons of a piggyback loan. First, you already have a second mortgage on your home. If you ever have an emergency where you need to use your home as equity it will be very difficult since you already have a second mortgage on your home. The second major con is that the second mortgage will haev a higher interest rate than a normal loan with PMI. Sometimes the interest rate can be 2% or 3% higher. Even though your monthly payment may be lower you will end up paying more for the loan in the end. The third major con is that PMI drops off after you have 20% equity in your home. This could happen quick if you overpay your minimum monthly payments. If you don’t have a piggyback loan your payment will decrease once PMI drops off, with a piggyback loan you are stuck with the second mortgage payment until it’s completely paid off.

In my oppinion in most cases you are better off to avoid a piggyback loan. Even though you will have a smaller monthly payment up front you will pay more in the end. Do the math for you own individual situation before you close the loan!

ARM loan mortgage – Adjustable Rate Mortgage

An adjustable  rate mortgage, commonly refered to as an ARM loan is a loan where the interest rate adjusts periodically based on a variety of indicies. There are different variations of an ARM loan some of which have a fixed rate for a certain period of time such as 3, 5, 7, or 10 years and after that period it turns to an adjustable rate and floats based on certain indicies.

There are also many other forms of an ARM loan including interest only ARM, balloon rate ARM, and negative amortization ARM. All of these types of loans have pros and cons, it’s knowing when to get the appropriate loan at the appropriate time that saves you money.

As mentioned earlier usually there is an initial interest rate for a certain period of time, usually 3, 5, 7, or 10 years. After this time period has expired the interest rate is adjusted based on the certin indicies.  There are caps on ARM loans interest rates which are usually about 5%  on top of the initial interest rate. So if your initial rate was 6% the most it could increase would be to 11% (pretty expensive if you ask me).  There is also usually an option to turn the ARM mortgage to a fixed rate for an additional fee. There is usually a prepayment fee on ARM loans as well.

A great time to consider an ARM loan is when you plan to be in your current home for less than 3 or 5 years and current interest rates are low. You can do an ARM loan for 3 or 5 years and the rate will be fixed for that amount of time and take advantage of the lower rate. When you are ready to move in 3 to 5 years you will be able to sell the house and purchase your next house and start the process over. You won’t even have to worry about the variable or floating interest rate.